Q31RQ - Horngren'S Financial And Managerial Accounting

Question

Describe the calculation of cost of goods sold when using the periodic inventory system.

 

Step-by-Step Solution

Answer

Answer

The cost of goods sold is computed by considering the opening inventory, net purchases, and closing inventory. 

 

Step 1: Meaning of Cost of Goods Sold

The cost of goods sold refers to the total cost associated with the production of goods. The total cost includes all the direct and indirect expenses incurred by a business entity to produce such products. 

Step 2: Calculation of cost of goods sold

The periodic inventory system does not consider each sales transaction and computes the cost of goods sold after the fixed intervals. 

The cost of goods sold is calculated as follows:

$\mathbf{Cost}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{goods}\mathbf{ }\mathbf{sold}\mathbf{=}\mathbf{Opening}\mathbf{ }\mathbf{inventory}\mathbf{+}\mathbf{Purchases}\mathbf{-}\mathbf{Closing}\mathbf{ }\mathbf{inventory}$